The Government’s 2016 budget to be unveiled on Friday will see a radical shift in tax policy targeting the rich, set the tone for more business and investment, though against the backdrop of a worsening economic environment. Macro-economic fundamentals are at dangerously low levels, 2015 budget targets have gone haywire and foreign exchange reserves are [...]

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2016 Budget: Tax reforms, Govt. in search of revenue

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The Government’s 2016 budget to be unveiled on Friday will see a radical shift in tax policy targeting the rich, set the tone for more business and investment, though against the backdrop of a worsening economic environment.

Macro-economic fundamentals are at dangerously low levels, 2015 budget targets have gone haywire and foreign exchange reserves are dwindling. Economist and retired Central Bank Deputy Governor W.A. Wijewardena, quoting Central Bank data, said that in the next 12 months the Government’s loan repayments would amount to US$ 4.4 billion. “We have only $5.5 billion as free (ready) cash; thus if we pay out $4.4 billion, we won’t have much money (left),” he told a meeting of the Sunday Times Business Club this week. (See detailed story in Business Times.)

Tax reforms are likely to include raising the direct-to-indirect tax ratio reach by 2020 to 60(direct):40(indirect) from 80:20. This was also referred to in Prime Minister Ranil Wickremesinghe’s mid-term development policy statement presented to Parliament on November 5.

Finance Ministry sources said at least 60 per cent of the affluent class who were not paying taxes would be brought under the tax net. Revenue proposals would be devised to increase direct taxes while bringing down indirect taxes for the benefit of middle and low income groups.

They said that on the cards was a shift in the fertilizer subsidy scheme. Cash vouchers would be provided to farmers to buy fertiliser from the market instead of the current scheme of getting it straight from nominated suppliers, a proposal aimed at providing farmers the choice of getting good quality fertiliser, an issue the JVP has been complaining about.

Currently the Government spends Rs. 50 billion to provide to thousands of farmers 50kg bags of fertiliser at the rate of Rs. 350 each.A revamp of tax slabs for individuals and incentives to encourage savings and investment in housing would be part of the budget package aimed at not only providing relief to the common man but also to boost savings, the sources said.

To maximise land use, tax incentives would be provided for entrepreneurs in the agriculture sector engaged in inter-cropping activities. Tax incentives would be provided to encourage vegetable and food processing units, the sources said.

A progressive new tax on goods and services, based on the people’s ability to pay would be introduced while more revenue would be raised within the Nation building Tax, excise duty and income tax. Another action proposed is to widen revenue collection through increase in the tax base and additional revenues through non-fiscal resources such as divestments. Unviable state companies would be given to more efficient private sector management or sold (in an extreme case).

The economic situation is unfavourable with a rising trade deficit, declining foreign reserves, a deteriorating balance of payments and expenditure rising without appropriate increases in revenue.Sri Lanka’s total borrowing requirement from both foreign and local sources for next year will be Rs. 1,349 billion, according to 2016 budget figures.

Revenue at the prevailing rates structure and foreign grants have been estimated to be around Rs. 1,789 billion while the total expenditure provision for 2016 (without budget proposals) is estimated at Rs. 3,138 billion.

Gajma Tax Consultant Senior Partner, N. R. Gajendran, told the Sunday Times that the Government should increase the tax base by getting individuals outside the tax net into the tax system, adjust tax rates and eliminate malpractice. The main problem with Sri Lanka’s indirect tax structure was over-dependence on imports, he said.

Almost all indirect taxes had a component of import-related charges. When import volumes were dropped, all related tax revenues would also be reduced, he said adding that the Prime Minister’s mid-term economic policy should be followed when preparing the budgets for the next five years.

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